Published on Thursday, December 11, 2014 by Mukesh Kothari, Chittorgarh.com Team | Modified on Saturday, October 1, 2016
[This article was first published in the November, 2014, issue of Smart Investment, The weekly investment journal.]
For years; I follow the brokerage industry very closely. Recently I came across a radical change in the India brokerage industry. This has drastically changed the trading habits of many traders and has brought down the brokerage cost significantly.
In this article I will explain about how new breeds of broker are taking the traditional brokers head on and how the broking industry in India is heading for a change.
As stock market investors we all use brokers on a regular basis. Any transaction (buy & sell shares or contracts) in the stock market requires a stock broker who works like an agent between the stock exchange and investors. These brokers are registered members of the stock exchange and regulated by SEBI.
Today; the retail brokerage business model in India may be classified into 2 broad categories:
Traditional brokers are full service brokers offering trading (stocks, commodities and currency), research and advisory, investment banking, sales and asset management under one umbrella. They also allow investing in Forex, Mutual Funds, IPOs, FDs, Bonds and Insurance. In some cases full-service brokers also have in-house banking and demat account services.
India has over 10,000 traditional retail brokers. They are 'advisors' for the client and at the same time salesmen for the financial products. ICICIDirect, Kotak Security, HDFC Sec, Sharekhan, MotilalOswal, India Infoline are some of the full-service brokers.
Discount brokers offer low brokerage, high speed and the state-of-the-art execution platform for trading in stocks, commodities and currency derivatives. They offer 'no-frills' brokerage service for 'do-it-yourself' traders who understand the market well. They are also known as online brokers who offer savings of 80-90% on brokerage.
India has around 15 discount brokers including ProStocks, Zerodha, RKSV, Trade Smart Online, Achiievers, SAS online etc. While there are few discount brokers in the India stock marketand they combined to contribute around 10% of the turnover at BSE and NSE.
Full-service brokers are traditionally offering personal services in the neighborhood through branches / franchise (MotilalOswal, ICICIDirect, Sharekhan etc). Discount brokers are new breed of brokers offering technologically advanced service at extremely cheap online brokerage services.
Below is the brief comparison of 2 full-service and 2 discount brokers in terms of fees, brokerage and transaction/turnover charges.
|Broker||Type of Broker||Account Opening Fee||Brokerage Account AMC||Demat Account Opening Fee||Demat Account AMC||Trading Terminal Fee||Call & Trade Charges||Minimum Brokerage|
|ICICIDirect||Full-service||Rs 975||Free||Free||Rs 450||Rs 900/year||Free||Rs 35|
|Sharekhan||Full-service||Rs 750||Rs 400||Free||Rs 400||Nil||Free||10 paisa *|
|ProStocks||Discount||Free||Free||Free||Free||Free||Rs 10||Rs 15|
|Zerodha||Discount||Rs 300||Free||Rs 100||Rs 300||Free||Rs 20||Nil|
|RKSV||Discount||Rs 250||Free||Free||Rs 300||Free||Rs 20||Nil|
|* Sharekhan charge minimum broker of 5 to 10 paisa per share+ Rs 16 DP Charges.|
|Broker Name||Account Type||Equity Delivery||Equity Intraday||Equity Futures||Equity Options||Commodity||Curr Futures||Curr Options|
|ICICIDirect||I-Secure Plan||0.55%||0.28%||0.05% - 0.03%||Rs 95 - Rs 65 / lot||NA||0.050% - 0.030%||Rs 95 - Rs 65 / lot|
|Sharekhan||Classic Account||0.50%||0.10%||0.10%||Rs 100|
|ProStocks||Free||Rs 15 per trade||Rs 15 per trade||Rs 15 per trade||NA||Rs 15 per trade||Rs 15 per trade|
|Zerodha||Free||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade|
|RKSV||Dream Plan||Free||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade||Rs 20 per trade|
|SAS Online||Rs 999 Equity Plan*||Rs 0||Rs 0||Rs 0||Rs 0||NA||NA||NA|
|* SAS Online flat monthly brokerage plan offers 'unlimited trading'in Equity Cash and F&O segments.|
|Broker Name||Equity Delivery||Equity Intraday||Equity Futures||Equity Options||Commodity||Curr Futures||Curr Options|
|ICICIDirect||NSE: 0.0031% | BSE: 0.0028%||NSE: 0.0031% | BSE: 0.0028%||0.0018%||0.05% on Premium||NA||0.0012%||0.05% on Premium|
|Sharekhan||NSE 0.00325% | BSE 0.00275%||NSE 0.00325% | BSE 0.00275%||NSE 0.0019% | BSE 0.0005%||NSE 0.05% | BSE 0.0005%||MCX (Non-Agri) 0.0023% | MCX (Agri) 0.00095%||NSE 0.00135% | MCX 0.00130%||NSE 0.04220% | MCX 0.03220%|
|ProStocks||NSE: 0.00325% | BSE: 0.00275%||NSE: 0.00325% | BSE: 0.00275%||NSE: 0.0019% | BSE: 0.0005%||NSE: 0.050% | BSE: 0.0025% on premium||NA||NSE: 0.0011% | BSE: 0.0010%||NSE: 0.040% | BSE: 0.0010%|
|Zerodha||NSE: 0.00325% | BSE: 0.00275%||NSE: 0.00325% | BSE: 0.00275%||NSE: 0.0021% | BSE: 0.0007%||NSE: 0.053% | BSE: 0.0027% on premium||Non-Agri: 0.0031% | Agri: 0.00175%||NSE: 0.00135% | MCX-SX: 0.0013%||NSE: 0.044% | MCX-SX: 0.037%|
This comparison shows that discount brokers charges much less brokerage. Most discount brokers also do not charge minimum brokerage. Their transaction/turnover charges are lower than most traditional brokers.
Let's compare full-service and discount brokers side by side on parameters which matters for most traders / investor of India's share & commodities trading market.
|Full-service Broker||Discount Broker|
|Personalize Local Services||They have large branch/franchise network and offer personal services. In other words; they have their time and place.||They have none or few branch / franchise. They are online brokers having couple of offices in metro cities.|
|Number of Retail Brokers||There are 10,000+ retail brokers in India. Around 500 brokers closed their shops in last 1 year. Many others have downscaled including largest 'India Infoline'.||Most discount brokers started business after year 2010.Today there are around 15 discount brokers but they account for over 10% of total transaction at NSE.|
|Add-on Services||They offer research reports, personal recommendations, funding, extended margins and many other add-on services.||They are online brokers focused mainly on trading. They don't offer research, funding and other add-on services.|
|3-in-1 account||Many offers 3-in-1 account for seamless transactions. This includes trading account, demat and bank account.||Only trading account is offered. Customer has to open/use demat & bank account from other companies.|
|Brokerage Charges||Most brokers charge brokerage in % of total trade value. The brokerage can also be negotiated in most cases. Most full-service brokers are not transparent in terms of charges. Some broker offers prepaid plans with complex terms and conditions.||They charge much reduced commission (60-80% cheaper). Most of them charge flat rate brokerage (i.e. Rs 20 per trade) irrespective to the size of the trade. Some also offer fixed monthly brokerage for unlimited trading (i.e. Rs 1,899 for unlimited equity trading).|
|AMC||Most charges annual maintenance fee.||No AMC for Trading Account.|
|Minimum Brokerage||They charge minimum brokerage.||No minimum brokerage. Helps trading in very small quantity or in penny stocks.|
|Call & Trade||Free with most full-service brokers.||They charge additional fee for call & trade (i.e. Rs 20 per executed order).|
|Penny Stock Trading||Very expensive as they charge minimum brokerage.||Very cheap as their brokerage is like '0.01% or Rs 20/Trade whichever is lower' for equity intraday with no minimum brokerage.|
|Software Charges||Most of them charges extra to retail investors for using trading terminal.||All trading platforms i.e. website, mobile app and trading terminals are free.|
|Funding||Many of them offer funding for trading.||No funding is available through broker.|
|Margin Offered||They offer higher margin based on your personal relationship with the broker.||The margin offered is standard margin which is same for all the customers.|
|Investment Options||They are active in all areas of security business including investing in Stocks, Commodities, Forex, Mutual Funds, IPOs, FDs, Bonds and Insurances.||Stocks, commodities and currency derivatives trading at NSE, BSE and MCX.|
|Target Customers||People, who need help from broker giving them stock tips, manage their portfolio, seeking diversification and the right asset allocation.||They are mainly for 'do-it-yourself' traders. They serve traders seeking low-cost execution.|
|Focus||As the brokerage market is overcrowded the traditional broker are focusing more on investor advisory as a business model.||At discount brokerage; fees are kept low because they offer fewer products and keep their operational cost very low. The business model is built on having an effective system and quality service in order to put through the most volume.|
By now you may have got a good idea of how discount brokers are different from full-service brokers. Let's talk about the myths and doubts most traders have about discount brokers. Here I will try to clarify few doubts many traders have about discount brokers.
Introduction of the electronic trading made radical changes in the Indian stock market. It increased trading volume and liquidity, slashed the cost of intermediation and broadened access to markets.
To leverage the changing brokerage industry; in 2010 a new kind of brokers (discount brokers) entered in the market. Their business model was different from traditional brokers offering personalize service to lakhs of stock/commodity market investors and at the same time charge significant fees.
The discount brokers were built on philosophy of leveraging technology to empower customers by providing them the best pricing, customer service, and tools they need to make profits. Here are few of the myths or doubts explained about discount brokers:
|Trustworthiness / Reliability||They are equally reliable as traditional brokers. They are registered with the stock exchanges (BSE, NSE and MCX) and regulated by SEBI. They are regularly audited by the exchanges.|
Your money and shares are as safe as with them as with any other popular traditional share broker in your neighborhood.
|Customer Service||Despite their low brokerage; they offer excellent customer service.|
|Do they make enough money to offer good service?||Yes, they make enough money to offer excellent customer service.|
While discount Brokers have very skinny profit margin; they believe in low cost online execution. Their operational cost is much lower in comparison to traditional brokers. Their customer acquisition cost is also low as they do not spend much money in advertisement.
|Trading Services Offered||Most discount broker offers trading service in stock, commodity and currency derivative segments across all popular stock exchanges. Because they focus only on trading; they are specialized to meet the need of traders.|
|Hidden Fees||Discount brokers are most transparent brokers. There are no hidden charges. Their software's are free; including trading terminal, mobile app and website. There is no AMC for trading account. The calculation of brokerage is very easy. They do charge extra for call & trade to discourage customers to use this service.|
|Automated Trading||Most discount brokers offer Alog trading (semi-automated or fully-automated). With the very low brokerage; it's possible to trade frequently with shorter break-even point to make profits.|
|Popular Segment||F&O trading segment accounts for most trading in India and also for the discount brokers.|
|Number of Customers||Over 2 lakh traders moved in last 3 years to discount brokers and the growth is exponential. They have relatively higher number of active clients than full-service brokers. They are growing at 50-60% every year.|
Discount brokers are no more the buzz in the town; they offer real value to many frequent traders. They are changing the dynamics of brokerage industry with technologically advance trading platforms, online investor education and cheapest brokerage charges. Most traditional brokers (i.e. Sharekhan, India Infoline) are in the brokerage business for decades and we know lot more about them.
So far we did talk about full-service and discount brokers in general. Now I will discuss about few popular discount brokers in India and what do they offer for traders like you.
Most traditional brokers (i.e. Sharekhan, Motilal Oswal) are in the brokerage business for decades and we know lot more about them.
The availability of high speed internet, increased use of computers and customer long term desire to reduce the brokerage build a market for discount brokers who opened their shops in India in year 2010. Since then few lakh traders are already moved from traditional brokers to flat fee discount brokers.
Today there are around 15 discount brokers in India including ProStocks, Zerodha, RKSV, Trade Smart Online, Compositedge, Traderjini, Bezel etc. Some of the most popular discount brokers are:
ProStocks, a Mumbai based online stock broker is among the popular online broker offering low cost brokerage services. ProStocks offer stock and currency derivatives trading at BSE and NSE.
It has 2 pricing plans:
Incorporated in 2010; Zerodha, a Bangalore based broker was the first broker to offer discount brokerage services to retail investors in India. In short span of 3+ years, Zerodha contributes to over 2% (Rs4 to 6k Cr) of the NSE total turnover. This is a significant volume in the market where there are 10,000+ brokers.
Zerodha offer stocks, commodities and currency derivatives trading at BSE, NSE and MCX.
It has one simplest pricing model:
RKSV (or UpStox), a Mumbai based discount broker entered in to retail brokerage business in early 2012 with goal to significantly reduce the cost of trading in India for retail traders by offering low-cost brokerage services. RKSV is among the top discount broker.
Brokerage plans offered:
Trade Smart Online (TSO) is a Mumbai based discount brokerage firm offering low cost unlimited trading plans. TSO is an initiative by VNS Finance & Capital Services Ltd, a full-service broker since 1994.
Brokerage plans offered:
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